• AUGUST 6, 2001

NIIT: Growth concerns

NIITís performance for the quarter ended June 2001 was way below expectations. Infact, the consensus estimates pointed to net profits in the range of Rs 480 m to Rs 530 m. But when the figures actually came out NIIT had net profits of just Rs 53 m, a 93% drop compared to the quarter ended June 2000. The question is what happened? (The company has not given quarterly break up of revenues. However, the breakup for consolidated revenues is available)

On a consolidated basis, 55% of revenues came from the education business and the software business contributed the remaining 45%. On a YoY basis the software business has shown a growth of 6% and the education business has shown a significant decline of 43%. However, on a QoQ basis the software revenues declined by 17%. The companyís operating margins for 3QFY02 was 3.8% compared to 29.8% in 3QFY01. While for the software business topline growth is the problem, for the education business growth along with the realisations have come down.

NIIT explained that its education business too had been impacted by the global economic slowdown and the impact was early, and larger than normal. The company held the torrential flow of negative news responsible for weakening in consumer demand for software education. There is doubt about this. The courses that have taken a hit are the NIITís short term courses like SWIFT and CATS. While the SWIFT is targeted at the beginners segment, CATS (curriculum for advanced technology studies) is targeted at IT professionals who wish to upgrade their skill sets. Demand for CATS could have been also from a segment that wanted a quick entry into the IT sector. However, the decline in demand for professionals and more so professionals with less experience have caused the demand for these courses to decline, as companies have become a lot more selective while recruiting.

Consolidated revenue mix
Revenue mix FY01 1QFY02 2QFY02 3QFY02
Futrz 60% 56% 69% 68%
Cats 27% 29% 20% 14%
Swift 13% 15% 11% 18%
Total 100% 100% 100% 100%

The long term courses from the company like Futurz that prepares students for a career in the IT industry and have durations anywhere between 6 months to 4 years too seem to be under pressure.

In the second quarter for FY02 the registrations had shot up by 20% YoY growth. However, for the third quarter the company has not given out the figure for registrations but the number of students is up by 2%. While the realisations have declined for all the courses offered by the company, the real cause for concern would be the decline in volumes of the long-term courses. This is due to the fact that students who enroll for the long-term courses would be looking for jobs after quite some. Therefore, a decline in the long-term courses registration would indicate doubts about the benefits from these courses. If this is true then the future prospects for the software education sector could be quite bleak. However, if the de-growth is limited to the short-term courses this could indicate a temporary phenomenon due to the slowdown.

Revenues (Rs m) 3QFY01 3QFY02 Change
Futurz 1,114 597 -46.4%
Cats 464 309 -33.4%
Swift 279 160 -42.6%

For the software business the company feels problems lies in the fact that its focus is on emerging technologies and it does not have expertise in the area like legacy systems. Corporates are currently limiting their IT spend to existing systems and have postponed the deployment of emerging technologies. The company however, managed to add a total of 23 new international customers during the quarter. These include organisations like SATS, Sony Hong Kong, CoKinetic, Hitachi Data Systems and Midas Kapiti. Fresh order intake during the quarter was US$ 11 m (Rs 511 m).

The key concern is the education business. It is unlikely to show a turn around till the demand for IT professionalís picks up. This is linked to the US economy, which is expected to recover in the mid next year. Even if the volumes pick up, will the company be able to improve realisations? Therefore, in the next few quarter the companyís education business might not show growth. The fear is that it might show a further de-growth. On the software business front, the company might manage to get a few projects and be able to improve the growth figures after two quarters when it gets its act in place, and starts earnings from areas like legacy systems. Till then the companyís stock price might not see much of an improvement in valuations. At the current market price of Rs 190, the stock is trading at a P/E multiple of 8 time its FY02E earnings.

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